Question

Consider the following information on a portfolio of three stocks:

State of Economy	Probability of State of Economy	Stock A Rate of Return	Stock B Rate of Return	Stock C Rate of Return
Boom	.13	.10	.35	.42
Normal	.52	.18	.30	.28
Bust	.35	.19	–.29	–.38

Required:
(a)	If your portfolio is invested 42 percent each in A and B and 16 percent in C, what is the portfolio’s expected return, the variance, and the standard deviation? (Do not round intermediate calculations. Round your variance answer to 5 decimal places (e.g., 32.16161) and input your other answers as a percentage rounded to 2 decimal places (e.g., 32.16).)

Expected return	%
Variance
Standard deviation	%

(b)	If the expected T-bill rate is 4.65 percent, what is the expected risk premium on the portfolio? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Expected risk premium

%

show steps please

Answer 1

I K L M - X V fx =H3-$J$7 A B C D E F G H Expected State of Rate of returns if state Weighted returns if state occurs portfolio 1 economy occurs (Weight Return) return (r) 2 | A | B | C ТА Т В с 1 Boom L 10% 35% 42% 4.20% 14.70% 6.72% 25.62% 4. Normal 18% 30% 28% 7.56% 12.60% 4.48% 24.64% 5 Recession 19% -29% -38% 7.98% -12.18% -6.08% -10.28% J Expected return [rxP(r)= u Probability (PC)] r- r-u)^2 P(r)x(r-u)^2 0.13 0.52 0.35 3.33% 12.81% -3.60% 13.07% 12.09% -22.83% 1.71% 1.46% 5.21% 0.22% 0.76% 1.82% 7 Weights 42% 42% 16% Expected return (u) 12.55% Variance (o2) 0.02806 Standard deviation (0) 16.75% 12.55% 10 11 12 Expected return 13 14 Variance 15 16 Standard deviation (0) 0.02806 16.75% 17 18 Expected risk premium 7.90% =)7-4.65%

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